Industry Analysis

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CELL PHONE INDUSTRY ANALYSIS

by Joshua Chan Zhisui Chen Irene Cormane Nou Her Renie Thomas

MGMT 182

May 12, 2006

Table of Contents

Table of Contents

1

IntroductionThe following report details cell phone industry analysis, which deals with cell phone manufacturers as well as cell phone services. This analysis includes the dominant economic characteristics, Six Forces of Competition (Porters Five Forces of Competition), driving forces of the cell phone industry, strategic mapping of company strengths, the ease entry and exit into the cell phone industry, and the overall industry outlook.

Dominant Economic Indicators1. Market Size: The cell phone industry is one of the fastest growths besides the Internet. Cell phones have gone through a huge change and its market has expanded globally. Since 1994, the cell phone industry has increased from 24 million to about 182 million in wireless phone and related devices operating in the United States with some 162-million mobile-phone users in the United States alone. The cell phone market is increasing very fast with todays ever-emerging technology and innovation in improving cell phones. Today, society is living with advance technology and everyone wants to keep pace with the new technologies. Cell phone industry is growing larger because it has become a necessity. Parents are getting mobile phones for their teens because they want to communicate in case of an emergency and the wireless carriers have made it easy to add users to their existing plans. And carriers are becoming successful in getting parents to expand their plans to include their teens. This increases buyers and increases market size worldwide. 2. Scope of Competitive Rivalry: The cell phone industry has become increasingly larger within the last three years as a result of more affordable cellular phones as well as lower service costs. Companies are competing in an advance technology and communication sector in which success attracts customers to buy their products and services. The market is very competitive because they offer the same products and services, but has different physical attributes to the phones and different costs, which buyers have choices to choose from. Companies want to provide the best products and services to

2 attract buyers by lowering cost and improving products, which makes the cell phone industry very competitive. Here are the main factors of competitive rivalry: Cell phone cost: Customers wants better services and products at a lower cost. Bundle functions into just one cell phone: For example E-mail, text messaging, internet New technology improvement: For example camera phones Better landline services

3. Stage in Life Cycle: The cell phone industry is in the Mature Life Cycle Stage, where nearly all-potential customers are already users of the industrys product. The cell phone industrys growth and profitability depends entirely on its ability to attract new customers. By increasing and improving the cell phones and services, it will attract more potential buyers, because technology alone will not attract buyers, instead companies want value-added services for mobile-phone securities. Cell Phone companies attract buyers in two ways during the Mature Life Cycle State: Service: Making cell phone more affordable will attract buyers to buy more cell phones and increase competition between companies to lower service fee. Innovative Phone Style: The new designs and improvement in the physical appearance of the cell phones, and more add-on features attracts customers to buy it at a higher rate. 4. Numbers of Companies in the Industry: There are over 50 companies with only six top companies in the cell phone industry that controls 80 percent of the market. Even though there are emerging new companies into the market, they are relatively small. The six top companies are rank as follow as the largest to the smallest cell phone company: 1. Verizon Wireless 2. Cingular Wireless 3. AT&T Wireless 4. Sprint Wireless 5. Nextel Wireless

3 6. T-Mobile Wireless Verizon is the number one largest company having 38.9 million U.S. customers. Some companies have suffered low profitability for merging with another company, which resulted in only four of the six companies that controls 80 percent of the market. The following companies merged resulting in only four companies; Sprint merged with Nextel, and Cingular bought AT&T. Below are financial highlights showing how well the four cell phone service companies that are occupying the market are faring. Financial Highlights Revenue (2005) Revenue Growth (1 yr) Employees (2005) Employee growth (1 yr) 5. Customers: Cell phones are attractive targets that are small, expensive, and useful. Today there are approximately 162 million mobile-phone users in United States alone. With the list of features and data applications available on mobile phones, which is continuing to grow and emerge; cell phones are not only a luxury but also necessity. Cell phone users use cell phones for more than just talking; the mobile services consumer wireless usage study found that 56 percent of customers used their cell phones as cameras, clocks, calendars, music players, and other non-talk functions. Also, most cell phone owners are between the ages of 18 to 34. However, consumers dependency on cell phones can pose a threat that force users to be victims of paying too much for cellular phone services. There are numerous complaints about low quality service in the industry due to the competition between companies. By lowering costs for the services, the company will lose profits and reduce their shares. Customers today, typically complain about the high cost for the services of having to stay on a contract for a long time and paying an early cancellation fee. Also, with low service line, customers rather pay higher price for better services such as receptions. Sprint 34680.00 M 26.40% 79,900 33.40% Verizon 27662.00 M 23.00% 49,800 13.40% Cingular 19436.00 M 25.50% 70,300 78.40% T-Mobile 9366.00 M 12.10% 22,616 5.10%

4 Cell phone companies know that consumers dislike mobile-phone services. In fact, mobile phone services were the second lowest-ranked industry. Mobile companies were also the number two sector in complaints in 2005. Many companies claim that consumers love their cell phones and that theyre very happy with the services, which is a half truth. Consumers complain frequently about dropped calls, lousy customer service and exorbitant penalties from exiting a contract. A new option in cell phone usage has come into being, which lets subscribers keep their old numbers when switching carriers. About 47 percent of all cell phone customers would switch or consider switching cell phone service carriers just to get a lower rate and better service so they do not have to pay an average fee of $170 to cancel their service contract. With a poll during 2005, here are some key findings about consumers response to cell phone services and early termination fees: The fees for switching to a new cell phone company that provides lower rates and better services discouraged 36 percent of cell phone customers from switching. 89 percent agrees that early termination fee is a penalty to discourage switching cell phone companies. Cell phone early termination fees costs consumers more than $4.6 billion from 2002 to 2004 47 percent of consumers would consider switching if early termination fees were eliminated Here are the primary conclusions regarding cell phones: Cell phone companies early termination fees creates captive customers The fees inhibit competition in the cell phone industry Customers are well aware of the early termination fees as penalties rather than rates.

6. Technology/Innovation: Technology and innovation are advanced every year making the industry even more competitive. Cell phone companies that design and make evolutionary upgrades are emerging into the market to be more competitive. Here are some new technology and innovations on cell phones:

5 Unlicensed Mobile Access (UMA) will help those who have high-speed Wi-Fi routers overcome poor reception coverage in their houses or apartments. This is also a way for mobile carriers to expand without spending a lot of money on new infrastructure. It enables lots of users who use handsets to wirelessly download content at broadband speeds while traveling. Cell phone tour guides: Provides buyers with guides of places they want to see. For example. Weavers and Stillers voices are used as narrators in Talking Street that shows a series of cell-phone tours from Manhattan to the World Trade Center. The technology is meant to be more vivid and more exciting than books or live tours. Some in the industry believe that this new technology saves time and money. Also, not all mobilephone tour services charge a fee for using the service. Motorola iTunes phone is basically a hundred-song iPod shuffle built into it. This is killing the iPod mini because it is a value-added upgrade in which you get both the cell phone and songs together. Near Field Communication (NFC) technology lets wireless devices connect to other devices nearby and transfer data, which ranges from payment information to digital pictures. Building cell phones with embedded NFC chips could double when used as debit cards or electronic IDs. For example, in Japan and Korea, users can charge their phones with virtual cash; by waving their cell phones near an NFC-enabled machine to buy anything from a soda to lunch. This means NFC devices from different manufacturers must be interoperable and integrated to work with the credit card infrastructure and also, it requires working with Visa to encourage support of the new technology. A new launch for SkypeIn and Skype Voicemail are built by the same company, which makes the Skype software, and it allo